This page covers Comprehensive Annual Financial Report (CAFR), Management Discussion and Analysis and statement of net position (restricted net position).

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One of the most fundamental issues in accounting for any organization is identifying the accounting entity. This is made more difficult by the fact that general-purpose governments such as states and large cities and counties typically are complex organizations that include semiautonomous boards, commissions, and agencies created to accomplish projects or activities that, for one reason or another (generally restrictive clauses in state constitutions or statutes), may not be carried out by a government as originally constituted. Very often each legal entity issues a separate annual report. But, there are times when is it appropriate to combine these entities with a general-purpose government in order to give an overall picture of government operations. For example, state universities issue separate financial statements and appear as component units within the state government’s annual report. GASB Codification Sec. 2100 establishes that the financial reporting entity is the primary government together with its component units. The primary government can be a state government, a general-purpose local government such as a city or county, or a special-purpose government such as a school district. Component units are legally separate organizations for which the elected officials of the primary government are financially accountable. In addition, a component unit can be an organization for which the nature and significance of its relationship with a primary government are such that exclusion would cause the reporting entity’s financial statements to be misleading or incomplete. GASB provides guidance for determining when a primary government should include a legally separate organization in its financial report. First, the relationship with the related entity must have one of the following characteristics: (1) the primary government controls a voting majority of the other organization’s governing board or otherwise may impose its will on the organization; or (2) the other organization is fiscally dependent upon the primary government. An entity is fiscally dependent on a primary government if that government approves or modifies its budget, sets charges for its services, or if the government’s approval is required to issue debt. Second, the related organization must represent a financial benefit or burden to the primary government. A financial burden exists, for example, if the primary government is responsible for liabilities of the other organization. In contrast, a financial benefit exists if the government is entitled to or may access the other organization’s resources. Once it is determined that an organization is a component unit of a primary government, the issue becomes how to include its financial information in the primary government’s financial reports. GASB standards provide two methods for including component unit financial information with that of the primary government. The first is known as blending, because the financial information becomes part of the financial statements of the primary government. Blended organizations are reported as though they were funds of the primary government. Blending is appropriate when the component unit is so intertwined with the primary government that they are in substance the same entity. This may be the case if the two entities have the same governing boards, the primary government is the sole corporate member of the board, or management of the primary government has operational responsibility for the component unit. Additionally, blending is appropriate if the component unit provides services solely to the primary government or if the component unit’s debt is expected to be paid by the primary government. More commonly, component units are reported using discrete presentation. In discrete presentation, the financial information of the component is presented in a column, apart from the primary government and not included in the totals reported for the primary government. Discretely presented component units appear as separate columns in the government-wide statements. If there is more than one component unit, combining statements are provided showing financial information for each component unit.

information for each component unit.


In addition to the government-wide statement, governments are required to prepare fund-level financial statements within the three categories of funds: governmental, proprietary, and fiduciary. Because governments may have many governmental and proprietary funds, governments are only required to present separate columns for each major fund. The General Fund is always considered a major fund. Other governmental funds are considered major when both of the following conditions exist:

  1. total assets, liabilities, revenues, or expenditures of that individual governmental fund constitute 10 percent of the total for the governmental funds category, and
  2. total assets, liabilities, revenues, or expenditures of that individual governmental fund are 5 percent of the total of the governmental and enterprise categories, combined.

A similar test exists for determining major enterprise funds.

Deferred outflows are included with assets and deferred inflows are included with liabilities for purposes of applying these criteria. Similar tests are applied to determine major enterprise funds. Additionally, a government may designate any fund as a major fund if reporting that fund separately would be useful. Any funds not reported separately are aggregated and reported in a single column under the label nonmajor funds. If the reporting government is preparing a complete CAFR, a schedule showing the detail of nonmajor funds is provided in the other supplementary information section.


Introductory Section

The Introductory Section of a CAFR includes the table of contents, a letter of transmittal from the preparer (typically the government’s finance director), a list of government officials, and an organizational chart. If a government received a Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association in the prior year,1 the introductory section will include a reproduction of that certificate. The introductory section is not audited.

Management’s Discussion and Analysis (MD&A)

The MD&A provides an opportunity for the government to provide, in plain terms, an overview of the government’s financial activities. This section is considered Required Supplementary Information, which means that it is required and entails some auditor responsibility, but not as much as the basic financial statements. Auditors review the material to establish that it is not misleading in relation to the basic statements but do not include the MD&A in the scope of the audit. A number of specific items must be included:

  1. A brief discussion of the financial statements.
  2. Condensed financial information derived from the government-wide financial statements, comparing the current year with the prior year. GASB identifies specific items for discussion.
  3. An analysis of the government’s overall financial position and results of operations to assist users in assessing whether financial position has improved or deteriorated as a result of the year’s operations.
  4. An analysis of balances and transactions of individual funds.
  5. An analysis of significant variations between original and final budget amounts and between final budget amounts and actual results for the General Fund.
  6. A description of significant capital asset and long-term debt activity during the year.
  7. A discussion by governments that use the modified approach to report infrastructure assets, which includes: discussion of changes in the condition of infrastructure assets, comparison of assessed condition with the condition level established by the government, and disclosure of the difference between the amount needed to maintain infrastructure assets and the amount actually expended.
  8. A description of any known facts, decisions, or conditions that would have a significant effect on the government’s financial position or results of operations.

GASB Codification Sec. 2200.109 makes it clear that MD&A is limited to the preceding eight items. However, governments may expand the discussion of these items if deemed appropriate.

Government-wide Financial Statements: Statement of Net Position

Statement of Net Position

The Statement of Net Position presents the government-wide asset, liability, and net position balances (measured on the accrual basis and economic resources measurement focus). Notice there are two columns, one for the entity’s governmental activities and another for the business-type activities. Together, the governmental and business activities comprise the primary government. Similar information is presented in a separate column for the government’s discretely presented component units. Fiduciary activities, however, are not included in the government-wide statements. Prior year balances may be presented, but are not required.

Assets are generally reported in order of liquidity. A classified approach (presenting separate totals for current assets and current liabilities) may be used, but is not required. Note in particular that capital assets (property and equipment) are presented in the governmental activities column. This will not be the case when we examine the governmental fund-basis financial statements. The capital assets include infrastructure (roads, bridges, sewers, etc.) and are reported net of accumulated depreciation. Similarly, long-term debt is presented in the governmental activities column of the government-wide Statement of Net Position, but is not presented for governmental funds in the fund-basis balance sheet.

The difference between assets and liabilities is called net position and is reported in three categories. Net investment in capital assets is computed by taking the capital assets, less accumulated depreciation, and deducting outstanding debt that is related to the financing of capital assets. Liabilities incurred to finance operations (including long-term liabilities for compensated absences or employee benefits) would not be deducted. Restricted net position includes resources that are restricted by (a) external parties, including creditors, grantors, contributors, or by laws or regulations of other governments; or (b) laws or constitutional provisions of the reporting government. The remaining amount, unrestricted net position, is a “plug” figure that is determined by deducting the balances of the other two categories from the overall excess of assets over liabilities.

Government-wide Financial Statements: Statement of Activities

Government-wide Statement of Activities

Note the general format of the Statement of Activities . Expenses are measured on the accrual basis and reported first. Expenses for governmental activities are reported initially, followed by the business-type activities and the component units (reading from top to bottom). Direct expenses, including depreciation, are required to be reported by function (General Government, Judicial Administration, etc.). Although rarely done, governments may allocate indirect expenses to functions. However, the government is required to show a separate column for these allocated amounts.

Depreciation that relates to assets serving multiple functions may be allocated as an indirect expense, charged in total to general government, or displayed in a separate line. Interest on long-term debt would be included in direct expenses if the interest related to a single function. Most interest, however, cannot be identified with a single function and should be shown separately.

Revenues that can be directly associated with functions are deducted, and a net expense or revenue is presented. Examples include garbage collection fees, museum admissions, and parking fines. Charges for services include charges by enterprise funds, such as monthly charges for water used by homeowners and businesses. Grants and contributions are typically resources provided by other governments.

In contrast, general revenues are presented in the lower right-hand section of the statement. General revenues include tax revenues and those revenues that are not associated directly with a particular function or program. All taxes levied by the government, including those restricted to a particular purpose, are reported as general revenues. Contributions to endowments and extraordinary items (items that are both unusual and infrequent) are reported separately after general revenues. However, special items (items within the control of management but which are unusual in nature or infrequent in occurrence) are shown in a separate line within general revenues.

The Statement of Activities is a consolidated statement within columns (governmental activities, business-type activities, and component units), which means that interfund services provided and used and transfers between two governmental funds are eliminated. Transfers between governmental and business-type activities are displayed in the general revenues section and offset. Notice that the bottom line, Net position, ending, agrees with the balances appearing in the Statement of Net Position.

Governmental Funds: Balance Sheet

The governmental fund statements are prepared using the current financial resources measurement focus and the modified accrual basis of accounting. For this reason, capital assets and long-term debt do not appear on the Balance Sheet. The excess of assets and deferred outflows over liabilities and deferred inflows is labeled fund balance, an account title used only in the governmental funds. All other funds and the government-wide statements label the difference between assets and liabilities as net position.

Several features of the Balance Sheet should be noted. First, a total column is required. Secondly, fund balance is displayed within the categories of nonspendable, restricted, committed, assigned, and unassigned. These will be more fully described in later chapters, but represent varying degrees of constraint placed on the use of the (net) resources of governmental funds.